Question

A house was purchased at $120,000 with a 20% down payment. The purchasers took out a second mortgage for $10,000; after 5 years, the house appreciated to $175,000. The owners then paid $5,500 down on their first mortgage. How much equity do the owners have in the house?

a) $35,000
b) $45,500
c) $55,000
d) $40,500

Answer 1

The equity of the owners is calculated by determining the current market value of the house, which is $175,000, and subtracting the remaining loan amount of $100,500, resulting in an equity of $74,500. The provided answer choices do not match this calculation.

Step-by-step explanation:

To calculate the equity the owners have in their house, we will follow these steps:

1. Determine the initial loan amount after the 20% down payment.
2. Subtract the second mortgage and any additional payments from the initial loan amount.
3. Find the current market value of the house.
4. Calculate the equity by subtracting the remaining loan amount from the market value of the house.

Starting with an initial purchase price of $120,000 and a 20% down payment, the loan amount would be $120,000 - ($120,000 * 0.20) = $96,000. Adding the second mortgage of $10,000, the total amount borrowed becomes $106,000. After 5 years, the owners paid $5,500 down on the first mortgage. Thus, the remaining amount owed is $106,000 - $5,500 = $100,500. The current market value of the house is $175,000.

The equity is therefore calculated as:
$175,000 (current value) - $100,500 (remaining loan amount) = $74,500.

None of the answer choices (a) $35,000, (b) $45,500, (c) $55,000, or (d) $40,500 match the calculation, so there may be a mistake in the available options.